Restructuring, Just the Beginning

Market Economy Where Principles Are Observed Is the Goal of Restructuring

The equivocal attitude of the government and the creditors of financially ailing companies toward their liquidation suddenly swerved to a hawkish stance after President Kim Dae-jung instructed them to follow market principles in pursuing the second round of restructuring. Although the efficacy of the government''s latest policy on determining the fate of nonviable firms remains to be seen, the change from its previous dilly-dallying is commendable.

The public has lost so much confidence in the government''s restructuring efforts to date that it doubts the current administration has much of a will or the ability to pursue reforms. The government''s recent first mistake was the directive to creditor banks ?which are facing their own restructuring around the corner ?to make independent decisions on the fate of the companies on their last breath. It is foolhardy to expect creditor banks to reach the right verdict when exposing the financial woes of debt-ridden companies puts a greater dent in their bottom-line figures.

The first market principle the government must observe is the shouldering of full responsibility for pushing ahead with whatever measures are necessary.

Some believe the government''s new attitude is only an attempt to deflect the sense of crisis caused by the recently disclosed corruption of the Financial Supervisory Service. Whatever the reason, the government must make the right choices, even at the risk of taking a browbeating for the consequences. At least it demonstrated that it still has a resolve for reforms by deciding to follow market principles.

Expressing a will for something does not guarantee a concrete outcome, however. Deciding on the fate of faltering companies is only the first step of simply exposing problem areas. Although the liquidation of companies with many subcontractors and employees dependent on them has a great impact on the real economy, such as rising unemployment and a chain reaction of bankruptcies, a greater problem is the heavier burden to be placed on financial restructuring, due to the worsening financial distress of the banking sector. The government has taken a step closer to the crux of the problems, but virtually nothing has been achieved yet.

The primary objective of restructuring is establishing a system of market economy where the principles of autonomous competition are observed. In the real economy, the key goal of restructuring lies in reforming the chaebol, the family-owned conglomerates in Korea, to ease the concentration of economic power. In the financial sector, the goal is to restore self-rehabilitating powers of financial institutions and stabilize the market. But the government and the public seem to take restructuring only as the eradication of all forms of insolvency, and by injecting public funds.

It is necessary to revamp this impractical and irresponsible notion. Insolvency remains for the company or creditor banks to tackle after acquiring self-restorative capability. The government must inject public funds just enough to allow them to nurture this ability. Before voicing doubts about how the additionally raised 40 trillion won would prove insufficient due to the higher number of companies on the blacklist of liquidation, they have to ask themselves why the state of banks failed to improve noticeably even after the spending of more than 100 trillion won.

Pursuing restructuring in accordance with principles means restoring market functions, not zealously delving into the depth of corporate bankruptcies by using what can only be arbitrary criteria. We have to discard the foolish illusion that a certain method would work for us, just because it is the way things are done in foreign countries.

The most urgent task to pursue at this point is determining priorities and concentrating on the matter of the highest priority. We have to hold off dabbling in such uncertain experiments as mergers or holding companies. We have to concentrate all our energy on resuscitating financial institutions so that funds can circulate and the market function properly. We have to stop thinking like defeatists, taking market jitters as an unavoidable outcome of reforms. Instead, we have to firmly believe that restructuring will result in market stabilization.

We must not give in to the tantalizing temptation to simultaneously push ahead with a sweeping reform of the chaebol. As the Hyundai incident illustrated, maintaining discipline in the market is the most effective policy on conglomerates. The government''s job is to offer a systemic framework for improving the corporate ruling structure and for accelerating competition. For now, it has to concentrate all its resources on the most important task ?nursing the financial market back to life. It must also abandon any lingering attachment for offering short-term market stimulus packages, but instead give its all to improving the fundamental structure of banks and establishing a proper market system.

Now is not the moment to try to pull off several accomplishments, especially in light of the limited policy measures available, and the market''s level of confidence in the government. We won''t blame the government even if it fails to keep the promise to complete the restructuring process by the year-end. We just hope that this time round, its restructuring plan does not peter out to a disappointing ending, as before.

The writer is a professor of economics at Ewha Womans University.

by Chun Chu-song